A company has a constant growth of 4%, and a required rate of return of 18%. It has just paid a dividend of $2.50, what is the current share price valuatio
Question
A company has a constant growth of 4%, and a required rate of return of 18%. It has just paid a dividend of $2.50, what is the current share price valuation?
Solution
The current share price valuation can be calculated using the Gordon Growth Model, which is a model used to determine the intrinsic value of a stock, excluding external factors such as market conditions.
The formula for the Gordon Growth Model is:
P = D * (1 + g) / (k - g)
Where: P = price of the stock D = most recent dividend g = constant growth rate k = required rate of return
Given: D = $2.50 g = 4% or 0.04 k = 18% or 0.18
Substituting these values into the formula, we get:
P = 2.50 * (1 + 0.04) / (0.18 - 0.04)
P = 2.60 / 0.14
P = $18.57
Therefore, the current share price valuation is $18.57.
Similar Questions
What is the value of a share that has just paid a dividend of $1, growing at 5% and a required rate of return of 10%?
What is the value of a share that has been paying $2 dividends with no growth prospects, and a required rate of return of 10%?
Given the following information, calculate the dividend yield. Quarterly dividend: $0.50 per share Current share price: $20.00
A man invested Rs. 4455 in Rs. 10 shares quoted at Rs. 8.25. If the rate of dividend be 6%, his annual income is:
An investment offers to pay $100 a year forever starting at the end of year 6. If the interest rate is 8%, what is the investment's value today?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.